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Link-save trading and pricing of contingent claims

Katsiaryna Kaval and Ilya Molchanov
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Katsiaryna Kaval: University of Glasgow
Ilya Molchanov: University of Bern

Finance from University Library of Munich, Germany

Abstract: Transaction costs involved while trading several assets may be described using bid-ask spread of the asset prices. We assume that the prices of several assets may be linked, so that transactions involving several assets have prices that are not necessarily equal to the sums of (bid or ask) prices of the individual assets. The family of possible price combinations forms a convex (random) set which changes in time and is called the set-valued price process. It is shown that the necessary and sufficient condition for no arbitrage is the existence of a martingale selection, i.e. a martingale that takes values in the set-valued price process. Examples and applications to option pricing are discussed.

Keywords: bid-ask spread; multiple assets; price process; set-valued process; transaction costs (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: 2005-11-29
Note: Type of Document - pdf; pages: 26
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